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Monday, May 31, 2010

MOUSE IN A MAZE

I think we would all agree that gold is and has been in a secular bull market for the last 10 years.

Even if it took you three years to recognize the bull and you bought at the very top of the third C-wave a simple buy and hold strategy would have you up over 200%.

Now here is the challenge. Look at your portfolio since 04, and be honest with yourself. Has your investing strategy produced at least a 200% gain in that period? Have you even made money in that period? Have you consistently lost money?

If you haven't made any money and have just been spinning your wheels, or even worse you've lost money (I suspect over 90% of retail traders are going to be in this category) Then ask yourself why do you continue doing something that time has proven not to work? Do you think the market is all of a sudden going to change and your flawed strategy is going to finally start producing big profits?

BTW of the 10% (I'm being generous) that have made money virtually none of them have even come close to 200%. Because traders absolutely must control risk and that necessarily means small positions size, anyone doing 15-20% a year is an exceptional trader. And it takes a 20% return for 6 years in a row to increase ones portfolio by 200% in 6 years.

That means one would have had to ride the entire bull, correctly spotted the bear market, correctly navigated one of the most volatile periods in stock market history and again spotted the end of the bear and rode the cyclical bull. That's asking a lot from anyone to spot and trade through all those different market conditions successfully. I can guarantee there were very very few people who did.

There are several reasons why people choose a trading strategy. First and foremost, although very few people will even admit it to themselves, the vast majority of retail traders are motivated by a gambling addiction. All in all not a very healthy way to make money.

Second, most traders are deathly afraid of draw downs. They simply can not stand to see their account decline. Even if they rationally understand that their position is a winning position (as virtually all precious metal positions are at this time) they still require the market to do what they want when they want. If it doesn't adhere to their time schedule they are willing to take a loss instead of holding their position until the market decides to come around.

Third, most traders are under the delusion that they can in fact correctly navigate the future and in so doing immensely increase their profit above and beyond a simple buy and hold strategy. (I think most of you, if you honestly accessed your success or failure over the last 6 years have by now come to the conclusion that the dream of vastly superior returns by trading is a chimera that will never materialize.)

So why do we continue to do something that doesn't work, over and over again?

Many traders are like the proverbial mouse in a maze who keeps running down the same path again an again never getting the prize.

Every once in a while though a mouse will come along who breaks the pattern and chooses a different path. That's the mouse that gets the cheese.

If what you have been doing hasn't been working, then maybe its time to look for the cheese down a different path.

3 comments:

totally agree.. the trend is your friend. the difficult thing is that the role of the disciplined investor is akin to a soldier on guard duty at a monument. His job is to be at attention, but DO nothing. However, should action be required... he is ready to move. It is mentally demanding, but the best path to successfully guarding your portfolio

Many stocks are up more than 200% since March 2009 alone, so it's quite possible (my account is proof) that you can be up more since late 2008/early 2009 than gold has achieved since 2004. Not that I disagree with holding precious metals for this bull market, which I am also doing. But within a long term bear you can do a little more specific market timing and make good returns.

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